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Does the IRS have the authority to assess restaurateurs for employer FICA taxes related to workers' unreported tip income? In a recent ruling the Ninth Circuit Court of Appeals called this authority into question, parting ways with earlier decisions in the Seventh, Eleventh and Federal circuit courts.
In the 2001 case Fior D'Italia Inc. v. United States, the IRS computed a 14.49% tip rate on the restaurant's 1991 credit card sales and a 14.29% rate for 1992. It applied these rates to the restaurant's noncredit-card sales and estimated $156,545 of unreported tip income in 1991 and $147,529 in 1992. The IRS then assessed the restaurant for employer FICA at 7.65% on the estimated unreported tip income. It made no effort to allocate these assessments to the individual workers' Social Security wage histories.
IRC sections 3101, 3102, 3111, 3121(a) and 3121(q) put restaurants and …